Comment June 2006

Stoking the Beast

Cutting taxes to shrink government doesn’t work—and that spells trouble for the conservative movement

Trained at the University of Chicago, Niskanen spent his formative years crunching numbers at the RAND Corporation and then in the Pentagon (he was one of Defense Secretary Robert S. McNamara’s “whiz kids”) and in the Nixon administration’s Office of Management and Budget. He is a data guy, the sort of economist who responds to a visitor’s question by saying, “I’ve got a chart on that that I made up yesterday.” In the Reagan administration, he served as acting chairman of the Council of Economic Advisers. Blunt-spoken and seemingly impervious to partisanship, he was passed over for the permanent chairmanship after telling senior politicos, in Reagan’s presence, that one of their pet tax proposals would have made Walter Mondale proud.

Even during the Reagan years, Niskanen was suspicious of Starve the Beast. He thought it more likely that tax cuts, when unmatched with spending cuts, would reduce the apparent cost of government, thus stimulating rather than stunting Washington’s growth. “You make government look cheaper than it would otherwise be,” he said recently.

Suppose the federal budget is balanced at $1 trillion. Now suppose Congress reduces taxes by $200 billion without reducing spending. One result is a $200 billion deficit. Another result is that voters pay for only 80 percent of what government actually costs. Think of this as a 20 percent discount on government. As everyone knows, when you put something on sale, people buy more of it. Logically, then, tax cuts might increase the demand for government instead of reducing the supply of it. Or they might do some of each.

Which is it? To the naked eye, Starve the Beast looks suspiciously counterproductive. After all, spending (as a share of the gross domestic product, the standard way to measure it) went up, not down, after Reagan cut taxes in the early 1980s; it went down, not up, after the first President Bush and President Clinton raised taxes in the early 1990s; and it went up, not down, following the Bush tax cuts early in this decade.

Niskanen recently analyzed data from 1981 to 2005 and found his hunch strongly confirmed. When he performed a statistical regression that controlled for unemployment (which independently influences spending and taxes), he found, he says, “no sign that deficits have ever acted as a constraint on spending.” To the contrary: judging by the last twenty-five years (plenty of time for a fair test), a tax cut of 1 percent of the GDP increases the rate of spending growth by about 0.15 percent of the GDP a year. A comparable tax hike reduces spending growth by the same amount.

Again looking at 1981 to 2005, Niskanen then asked at what level taxes neither increase nor decrease spending. The answer: about 19 percent of the GDP. In other words, taxation above that level shrinks government, and taxation below it makes government grow. Thanks to the Bush tax cuts, revenues have been well below 19 percent since 2002 (17.8 percent last year). Perhaps not surprisingly, government spending has risen under Bush.

“I would like to be proven wrong,” says Niskanen. No wonder: for the modern conservative coalition, the implications of his findings are discomfiting, and in a sense tragic.

First, the root-canal economics of pre-Reagan conservatism was right all along: the way to limit the growth of government is to force politicians, and therefore voters, to pay for all the government they use—not to give them a discount.

Second, conservatives who are serious about halting or reversing the dizzying Bush-era expansion of government—if there are any such conservatives, something of an open question these days—should stop defending Bush’s tax cuts. Instead, they should be talking about raising taxes to at least 19 percent of the GDP. Voters will not shrink Big Government until they feel the pinch of its true cost.

Third, the most effective constraint of all is to raise taxes and cut spending: exactly the sort of anti-deficit package that anti-tax conservatives pummeled the first President Bush and President Clinton for approving, and exactly the sort of package that the current President Bush and his anti-tax allies are sworn to block.

The conservative movement is in no position to accept or even acknowledge those implications, now that tax cutting has become the long pole in the Republican tent. Therein lies the element of tragedy. By turning a limited-government movement into an anti-tax movement, conservatism has effectively gone into business with the Big Government that it claims to oppose. It is not starving the beast. It is fueling the beast’s appetite. And the beast has a credit card.

Jonathan Rauch is a correspondent for The Atlantic and a guest scholar at the Brookings Institution.
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Jonathan Rauch is a contributing editor of The Atlantic and National Journal and a senior fellow at the Brookings Institution.

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